One thing moving markets

… is the M2 money supply. This aggregate measure of money in the United States rose by $25.8 billion to $20.867 trillion in April from the previous month – the biggest increase in 13 months.¹

M2 mechanics

The M2 money supply is a measure of money that includes everything from physical currency and liquid bank deposits (think: checking accounts) to time deposits like CDs, retirement accounts, and retail money market funds. As such, it may be the best proxy out there for the total amount of cash in the U.S.

In any given month, minor changes to M2 are unlikely to have an outsized impact on the economy. However, long-run trends are important to monitor, as the overall supply of money strongly correlates to inflation and asset prices.

When there is more money circulating in the economy, there is more money to spend. This tends to drive demand — and, consequently, prices — higher.

M2 recent history

Following the COVID-19 pandemic and the accompanying financial stimulus, the M2 money supply quickly increased from $15.4 trillion in February 2020 to a peak of $21.7 trillion in April 2022. Shortly thereafter, inflation reached a multi-decade high. While other factors like supply chain disruptions and higher corporate margins contributed to the rise of inflation, many economists point to the expansion of M2 and the oversupply of money in the economy as a key driving force behind those surging prices, which are still being felt today.

Then, from April 2022 to October 2023, the M2 money supply declined by $1 trillion to $20.7 trillion. For most of that period, inflation steadily cooled as well. But it ticked up again in the first quarter of 2024 — just a few months after October 2023, when M2 began gradually increasing.¹

Why M2 matters

Inflation is top of mind for many market observers these days, and for good reason: It remains the principal focus of the Federal Reserve and the single biggest factor in officials’ decision to cut interest rates.

That being the case, the money supply’s trend of increasing since October 2023 — including the most recent increase in April — may be a bad sign for inflation in the near term. With M2 and overall liquidity in the U.S. economy on the rise again, consumer prices could take a longer, bumpier path back to the Fed’s 2% inflation target, or even experience further upward pressure.

If either of those scenarios plays out, the case for rate reductions in the coming months could be weaker, if not ruled out entirely.

And a few top headlines

Only 22% of U.S. adults believe college is worth the cost if loans are required, while nearly half think a four-year degree is less important for getting a well-paying job than it was 20 years ago.²

• From 2010 to 2020, the average annual tuition inflation rate was 12%.³ This has caused many students to explore alternatives like trade schools, which saw a more than 15% increase in enrollment in fall 2023.⁴

The IRS extended its free tax filing program Direct File through 2029, continuing its partnership with private tax software companies.⁵

• Individuals with an adjusted gross income of $79,000 or less in 2023 can use this program to file their 2024 taxes for free.

A container capacity crunch is worsening global trade issues, raising freight rates by 30% due to a combination of bad weather in Asia and peak shipping season, among other factors.⁶

• The increase in shipping prices could drive up consumer prices through June.

What to be on the lookout for next week

The non-farm payrolls report for May will be released on Friday, June 7.

For some time now, labor data have consistently shown a job market that just won’t crack – potentially playing a large part in the Fed’s decision to keep interest rates higher for longer. However, April’s data showed the U.S. added just 175,000 jobs, which was well below the expected 240,000. The unemployment rate also inched higher to 3.9%. Both figures were potential signs that the labor market and broader economy were, indeed, cooling.⁷

This upcoming report could be pivotal for markets, whether it signals last month’s data was the start of a trend or just an outlier in the jobs market’s ongoing resilience. In the case of the latter, it might be a warning that inflation is maintaining its strength. In the case of the former, the Fed could gain more confidence inflation is on its way out and begin easing its policy.